railroad for transporation. He receives a bill of lading for the wheat. He draws on his banker for the proportionate amount of the cost of the wheat, attaches the bill of lading properly indorsed, and cashes the draft. The banker has the title to the wheat evidenced by the bill of lading as security. When the commission merchant effects a sale he deducts his various charges and also pays the draft held by the banker. The remainder goes to the grain buyer, who in the meantime has invested the proceeds of the discounted draft and perhaps repeated the process several times.

While the grain buyer's capital is but five thousand dollars, his working capital for the season may exceed a hundred thousand dollars. He is thus, through the agency of the bill of lading and the draft, enabled greatly to increase his profits in a perfectly legitimate way.

221. Negotiability. These instruments do not possess all the elements of negotiable paper. For example, the guarantee of the indorser does not follow. A perfect title, however, is given, which is no greater than that possessed by the indorser. The guarantees of the common law exist in favor of the holder. The conditional guarantee of the law merchant is lacking.

222. QUESTIONS

Name some of the instruments that have not been given full negotiability.

What is a letter of credit? Explain its use. What is a traveler's check?

What is a bond? Who issues bonds? Do they bear interest, and how is the interest generally evidenced?

What is the measure

What is a warehouse receipt? Explain its use. of the banker's safety who loans on a warehouse receipt? What is a bill of lading? How is it used to raise money? Discuss the negotiability of these instruments.

223. DECISIONS BY THE COURTS

1. In 6 S. W. Reporter 48, it is held that a bank purchasing a draft with a bill of lading attached, and collecting the draft from the acceptors, warrants to the acceptors both the measure and quality of the goods men

tioned in the bill of lading. North Carolina and Texas so hold, while Iowa refuses to indorse the doctrine.

2. It is held in 29 Minn. 363 and 91 U. S. 92, that where the consignee named is the same person as the drawer of the draft with bill of lading attached, as where the draft reads, "Pay to the order of ourselves," etc., the bill of lading must not be delivered until payment of the draft. If delivered on acceptance, the collecting bank will be liable for payment of the draft, and this is so even if consignor indorses the bill of lading in blank.

3. In Court of Appeals N. Y. Feb. 5, 1901, G drew a draft on H. & Co., but having no funds with H. & Co., sent them, as collateral for the advance, an order on P. & Co., for 150 bales of cotton. H. & Co. sent the order by messenger to P. & Co., who replied as follows: "Cotton referred to, for account of G, cannot be shipped until next week when we will deliver to you." On this assurance H. & Co. paid this draft. By the time of delivery, G owed P. & Co. more than the value of the cotton and they refused to deliver. The court held that as their promise was without consideration they need not deliver. H. & Co. should have notified P. & Co. that they would not pay the draft or advance on the cotton until they had been promised that the cotton would be delivered, then the promise could have been enforced.

224. Introduction. The defenses offered as an objection to the payment of negotiable paper may be against the instrument or they may be of a personal character. To fully discuss the question it will be well to classify parties as mediate and immediate, and defenses as real and personal. Mediate parties are those who are separated by another party or parties, and immediate are those standing next to each other in their order of liability. A real defense is a defense or objection to the instrument itself, while a personal defense is one arising out of the transaction, and relates rather to the acts that caused the instrument to be issued than to the instrument itself. The following are real defenses: No delivery, incapacity, void by statute, alteration, and, perhaps, lunacy. The following are personal defenses: Fraud, duress, failure of consideration, and payment.

1. The Distinction. Personal defenses are good and available between immediate parties or a line of parties with notice.

They cease to be valid as soon as a bona fide party intervenes. Real defenses are good against all subsequent parties, whether mediate or immediate. Personal defenses are against the creative act, while real defenses are against the instrument; the former acknowledge the instrument but deny its standing; the latter deny very existence of the contract.

the

2. Delivery. This is one of the essential elements of all negotiable papers, and to prove that an instrument never was issued with the authority or consent of the maker is to defeat the legal effect of the instrument. Paper stolen and put into circulation by the thief does not in any way obligate the maker. No subsequent holder has a valid claim against the maker.

3. Incapacity. This defense, when urged against the enforcement of a negotiable instrument, needs no discussion. Parties lacking capacity are not bound by their contracts. The minor is an example of this class.

4. Void by Statute. If the statutes of a state declare an instrument invalid, it cannot be enforced even by a bona fide purchaser. While usury is illegal according to statute, it is not necessarily a defense against a purchaser in good faith. Notes given in consideration of wagers or gambling are frequently made void by statute.

5. Alteration. If a material alteration is made in an instrument the maker is released. The instrument is not the one signed and delivered. Forgery is a real defense, for it lacks intent and consent on the part of the one whose name is forged.

6. Lunacy. This is not necessarily a real defense. But if the maker is an adjudged lunatic, his negotiable instruments are void in the hands of all subsequent parties so far as he is concerned.

7. Fraud. If the transaction out of which issues a negotiable instrument is tainted with fraud, it is a personal defense and good only between immediate parties or those having knowledge of it; but if fraud is practiced in the making of an instrurnent, it is a real defense.

8. Duress. When a contract is procured by resorting to force, the delivery lacks both intent and consent. It is therefore voidable but not void. Properly, prompt effort should be made by the maker so that he may not be chargeable with negligence. Duress as a defense is always available against immediate parties, and, at times, will constitute a real defense.

9. Failure of Consideration. Consideration as a defense is always presumed between immediate parties, but this presumption may be overcome. As in ordinary contracts, inadequacy is no defense.

10. Payment. This is an extinguishment of the contfact and may always be offered as between immediate parties. If a transfer is made after maturity by the payee, the defense of payment is good against the subsequent party, because his transferrer has no property in a contract which has already been extinguished. If, however, the payment is made before the maturity of the paper and is transferred before maturity to an innocent purchaser, the defense of payment will not be effective.

225. QUESTIONS

Explain the following: defenses, mediate and immediate parties; real and personal defenses.

What is the distinction between a personal and a real defense? What constitutes a good delivery? What kind of a defense is incapacity? Give an example. Explain the defense “void by statute.”

What effect on the standing of an instrument has an alteration? Is lunacy a personal or a real defense? How does fraud affect a contract? What is duress and when a defense?

To what extent is failure of consideration a good defense? When is payment a good defense and when not?

1. In Town of E v. K, 84 Ill. 292, where certain negotiable bonds were declared by statute not to be valid and binding until certain conditions precedent were complied with, it was held, that unless it has been so expressly declared by the legislature, illegality of consideration will be no defense in an action at the suit of a bona fide holder without notice of the illegality, unless he obtained the bill or note after it became due.